McDonald's Has Surged, Starbucks Has Stumbled

I remember reading about McDonald's and Starbucks "going to war" not that long ago. McDonald's was going to start serving gourmet coffee in an attempt to lure some of the Starbucks client base, while Starbucks was going to start serving breakfast sandwiches in an attempt to stop people from hitting the McDonald's drive-thru on the way to work.

Both companies came out with guns a-blazing, but McDonald's had the secret weapon that quickly ended the "war" - the faltering US economy.

Let's be real - the US economy has been in a recession for a while now. The government can spin the numbers all they want, but the collapsing housing market and sky-high oil prices have contributed to an undeniable slowdown of the biggest economy in the world. Many people have been tightening their belts for a while now, unable to live off of home equity withdrawals and credit cards any longer.

One of the first things to go when you are tightening your belt? The $5 lattes at Starbucks. Those add up fast, and many Americans found that they simply couldn't justify shelling out hundreds of dollars for overpriced coffee any more. They switched to cheaper alternatives or simply started making their own coffee at home. Some found that the cheaper alternatives were just as good and didn't put such a dent in their wallets. Many Americans found that they could cut $200+ a month by simply not giving Starbucks anymore of their business.

The evidence of this is compelling. People are clearly attracted to the cheaper alternatives right now, which is why McDonald's stock has been so strong and the stock of Starbucks has been so weak.

How weak? Since September 14th, 2007, Starbucks is down a whopping 62%. McDonald's, on the other hand, is up 11.51%.

McDonald's just announced very strong third quarter earnings, and also said that their business is looking very strong over the short-term. Starbucks, on the other hand, is pretty much the exact opposite, announcing store closures and layoffs to cut costs.

When the economy was doing well, people didn't have any problem with shelling out hundreds of dollars per month for their lattes and mochas. They also turned their noses up at McDonald's and hit some of the higher-price alternatives. Now that the economy is reeling and people are watching where they spend their money, McDonald's has re-established its dominance and Starbucks is facing a very real crisis.